Businesses fight city on proposed tax increase

A proposal by Sacramento city officials to increase a bundle of business taxes is being called a job-killer by companies that would have to pay more.

The city charges a business operations tax of 40 cents per $1,000 in revenue, and the tax is capped at $5,000 a year. To deal with the city’s deep financial problem, city officials have proposed raising that tax over three years to 70 cents per $1,000 in revenue — and to raise the cap to $50,000.

“That is a 1,000 percent increase,” said Ray Enos, owner of Downtown Ford. His competitors in the county would continue to pay a flat business license fee of $140 for three years.

“This is a job-killer like you won’t believe,” Enos said. “You look at downtown Sacramento and all those vacant stores. You’re not going to get people to open those stores with taxes like these.”

Sacramento collects about $7.3 million annually with its business license tax. If the increase is approved for the ballot by the Sacramento City Council at its Tuesday meeting, projections are the city would collect about $14 million annually after the third year.

Sacramento started collecting a business license tax in 1975. The structure of the tax was most recently raised in 1991. There is no cost of living increase built into it, said Mark Prestwich, special projects manager with the city.

If approved by the council and then voters, the additional money would go to Sacramento’s general fund, which also means the measure would only need a majority vote on the ballot in November. A specific tax would require a much tougher two-thirds majority approval.

The additional money could be used for things such as keeping fire stations and swimming pools open, or paying for police positions.

Rising furor

Enos and others in the business community want the city to reconsider the tax and completely rewrite the proposal. The ordinance currently charges professionals — such as attorneys, accountants, doctors and dentists — a capped rate, and that would not change with the business license tax increase. Nonprofits such as hospitals pay nothing.

“In my discussions with people from the city, they keep talking about ‘businesses that are making all this money,’ but they don’t realize they are talking about revenue,” Enos said. “Every business model is different. Big revenue doesn’t mean big profits.”

Moreover, Enos said, the city seems to completely discount the fact that his business paid the city $500,000 through sales taxes last year and $700,000 in 2009.

Mel Rapton Honda two years ago completed its move from the county to a new dealership in the city limits, which means it would be subject to the tax increase. And as a high-revenue businesses, it would be paying the maximum rate, said Curtis Rapton, whose family owns the dealership.

“Our margins are so tiny it’s unbelievable in this economy,” Rapton said, adding that if the dealership had to pay an additional $45,000 last year, it would have been the difference between making a profit and ending the year in the red.

The city has heard the rising furor in the business community. Staff will put out a new draft proposal today with a lower cap and a proposal to raise the annual fee of 8 cents per year for three years to 64 cents per $1,000, Prestwich said. The new proposal might also have higher fees for professionals.

The depths of a recession is a bad time to raise taxes on business, said Matt Mahood, chief executive officer of the Sacramento Metro Chamber.

“If you look at the structure of the tax, it hits the retail and restaurant industry, which are low-margin businesses. It is not a fair assessment across all industries,” Mahood said.

“No other cities are looking at raising this tax.”

Prestwich said that compared to the largest cities in the state, Sacramento collects less money.

“You can’t compare Sacramento to San Francisco or Los Angeles. We’re a government town,” Enos said.

Clouding the issue

“There are a lot of tough choices in this economy,” said Megan MacPherson, spokeswoman with the city of Roseville, which is not considering raising its business license tax. The tax is a flat annual rate with a maximum payment of $250.

“For us, we are very business-oriented, and we are not looking at raising the cost of doing business here,” Roseville city manager Ray Kerridge said.

“It is the wrong message at the wrong time,” he said. “The big message from us is that Roseville is open for business.”

Kerridge until February was Sacramento’s city manager. The tax issue wasn’t around in the city six months ago, he said.

Sacramento Mayor Kevin Johnson wasn’t available for comment.

Sacramento County this year raised its business license fees for home-based businesses from $140 to $145 for a three-year license, which Cynthia Gibbs, county assistant tax collector, is quick to point out is not a tax.

“It covers the cost of administration and investigation,” Gibbs said.

The city of Sacramento’s staff report for raising the business license tax on 25,000 businesses also includes the issue of taxing marijuana businesses in the city.

“The whole marijuana tax is just an attempt to cloud the issue,” Enos said. “I think the whole thing should be rewritten from the beginning with input from the business community.”

Under the current rate, a business hits the $5,000 cap with $12.5 million in revenue. With the $50,000 cap, businesses hit the cap at $72 million in annual revenue. That would affect large local companies such as Rex Moore Electrical Contractors Inc., Maloof Sports & Entertainment and Western Blue Corp., according to Business Journal research.

As part of the business license changes, the city would make a special case for marijuana businesses, which currently pay the 0.4 percent business license rate. The proposal seeks to raise the license tax for marijuana businesses to 5 percent, which could be phased in over three years. That move would generate an additional $850,000 annually to the city’s general fund.

“We have had requests to separate the issues, and we are considering that,” Prestwich said.